My New Job Has A Great 401(k) Plan. Would A Reverse Rollover From My IRA Make Sense?

You’ve landed a new job, and one of the company perks is an impressive 401(k) plan. It offers low fees, solid investment options and maybe even some other perks like a Roth option.

But here’s the rub: You already have a sizable IRA, possibly from rolling over a previous employer’s 401(k). Now you’re wondering if it makes sense to move that money back into a 401(k) — a process known as a reverse rollover.

While traditional rollovers (from a 401(k) to an IRA) are common, reverse rollovers are less popular. However, in the right situation, they can be a good fit as you continue building wealth for retirement.

Before making the switch, it’s essential to understand when a reverse rollover makes sense and what factors to consider before transferring funds. It’s also wise to consult with a financial advisor, who can help you weigh your options and guide you through the process.

Here’s everything you need to know, according to financial experts.

When does a reverse rollover make sense?

A reverse rollover is when you transfer funds from an IRA into an employer-sponsored 401(k) plan. It’s not the go-to solution recommended by most financial advisors, but in some cases, it works.

Here are a few of those scenarios.

You want to delay RMDs

Once you turn 73, the IRS requires you to start taking required minimum distributions (RMDs) from traditional IRAs. These mandatory withdrawals can increase your taxable income and potentially push you into a higher tax bracket.

However, if you’re still working and your company’s 401(k) plan allows it, you might be able to delay RMDs. This exception doesn’t apply to IRAs though, only 401(k)s, so a reverse rollover can be a potential tax-saving strategy if you plan to keep working well into your 70s.

“In that case, RMDs would begin when you retire and end your employment,” says Joe Conroy, a certified financial planner and owner of Harford Retirement Planners.

You can also continue contributing to the 401(k) while working, allowing your contributions to grow tax-deferred even longer.

However, transferring funds into a company-sponsored 401(k) only helps you avoid RMDs so long as you stay with that employer, so keep that in mind when making your decision.

You want to perform a backdoor Roth IRA

If you’re a high earner and want to contribute to a Roth IRA but exceed the income limits, the backdoor Roth IRA strategy is a workaround. However, this method can be complicated if you already have tax-deferred IRA funds due to the IRS’s pro-rata rule.

“The IRS looks at your aggregate IRAs, not just the after-tax IRA you intend to convert when calculating the taxes of a conversion,” says Conroy.

Moving your pre-tax IRA funds into a 401(k) removes them from the equation, allowing you to execute a backdoor Roth IRA conversion more efficiently — and with fewer, if any, tax implications. If you anticipate using this strategy, a reverse rollover could make your tax planning easier.

You want easier access to penalty-free withdrawals

Rolling an IRA into a 401(k) can provide more flexible access to retirement funds with fewer penalties and taxes.

Many 401(k) plans allow loans — typically up to 50 percent of the balance or $50,000, whichever is less. Loans aren’t taxed as income so long as they’re repaid. On the other hand, IRAs don’t allow loans. IRA withdrawals are taxable and may come with a 10 percent early withdrawal penalty if you’re under 59½.

“If you want to use the 401(k) loan feature, that may tip the scales in favor of a reverse rollover,” says Joseph Boughan, a certified financial planner and managing member at Parkmount Financial Partners.

Other situations when a reverse rollover can make sense

Another benefit is that a 401(k) plan offers stronger creditor protection than an IRA.

“In general, the ERISA protection on the 401(k) funds tends to be stronger for those with higher liability risk,” says Nick Rygiel, a certified financial planner and owner of Ironclad Financial.

Under the Employee Retirement Income Security Act (ERISA), employer-sponsored 401(k)s are generally protected from creditors in the event of bankruptcy. IRAs, on the other hand, have varying levels of protection depending on state laws. If you’re concerned about asset protection, rolling funds back into a 401(k) could provide an extra layer of security.

The level of protection depends on state laws, so make sure to review local regulations if creditor protection is a priority for you.

Christopher Cleland, a certified financial planner at American Senior Benefits, offered some additional reasons why it might make sense to roll over an IRA to a company 401(k):

• You’re not managing your IRA well or you’re overwhelmed by the amount of investment options in your IRA.
• You want the ability to buy company stock at a discount in your 401(k).
• You want to consolidate your accounts.
• You want to take advantage of other tools like financial planning or estate planning services offered through the 401(k) plan’s fiduciary.

What to consider before rolling your IRA into a 401(k)

Before making the switch, take the time to evaluate whether a reverse rollover is truly in your best interest. Most experts say it usually isn’t worth it.

“Generally, it never makes sense to roll over an IRA to a 401(K),” says Cleland.

While a reverse rollover can be beneficial in certain uncommon tax planning scenarios, it usually isn’t a good fit for the average person.

Here’s a few reasons why.

Fewer investments to choose from

One key factor to consider before executing a reverse rollover is investment flexibility, says Conroy.

“401(k)s generally have a more limited menu of investments, maybe a couple dozen,” says Conroy. “IRAs, on the other hand, can have access to thousands of investment options.”

If your current IRA gives you access to specific investments you’re interested in, such as individual stocks, ETFs or alternative assets, you’ll likely lose those options by moving your money into a 401(k), which will typically offer a much narrower fund lineup.

Cleland points out that you’ll also miss out on more advanced trading strategies by switching to a 401(k), including trading options and using sell/buy stops on your positions.

Higher fees

Another consideration: 401(k) plans often have higher fees than IRAs.

“That’s because there are more administration costs involved to run a 401(k) retirement plan each year, even if that cost is spread across many participants,” says Conroy.

Some 401(k) funds also charge higher expense ratios than what you might find by opening an IRA through a low-cost brokerage firm.

Many online brokers now offer $0 minimums to open an IRA, and nearly all provide access to index funds with rock-bottom expense ratios. If your primary reason for considering a reverse rollover is investment flexibility or cost savings, it might be better to stick with your IRA and only contribute enough to your employer 401(k) to snag the company match, if one’s offered.

Other considerations

You’ll also need to be aware of your 401(k) plan’s rules. Not all 401(k)s accept reverse rollovers, and those that do might have restrictions on how and when you can access the funds. Check with your employer’s plan administrator to confirm whether a rollover is even possible and whether there are any limitations on withdrawals or distributions.

Taxes and withdrawal rules should also be reviewed. If you have both pre-tax and after-tax contributions in your IRA, moving funds into a 401(k) could complicate tax reporting.

How to do a reverse rollover

If you decide a reverse rollover is right for you, transferring the funds can be complicated. It’s best to consult a financial advisor before getting started to ensure the process goes smoothly and you avoid costly mistakes.

Here are the general steps to roll your IRA into a 401(k):

1. Confirm eligibility with your 401(k) plan provider: As mentioned earlier, not all employer-sponsored plans accept rollovers from IRAs. Check with your plan administrator and make sure this option is available. Also, gather deposit details, including where to send the check, required account numbers and any necessary forms.
2. Request a distribution: Choose where the check should be mailed and to whom. Many 401(k) providers allow direct deposits from your IRA provider, which is the simplest and safest method to avoid tax issues. If you choose an indirect rollover, you must deposit the funds into your 401(k) within 60 days to avoid taxes and penalties. Each IRA provider has its own distribution process, so be prepared to complete a form and state your reason for the transfer.
3. Pick your 401(k) investments: Once the funds are deposited into your employer-sponsored plan, you’ll need to invest them into funds that align with your risk tolerance and retirement goals. At this stage, it’s also a wise decision to double-check with both your IRA provider and 401(k) plan provider and make sure the transaction was completed correctly.
4. Report the rollover on your tax return: When filing your taxes, you’ll need to report the rollover properly in order to avoid penalties. You may receive a 1099-R from your IRA provider showing the distribution amount. On your 1040 tax return, report this as an IRA distribution, but mark the taxable amount as $0 and indicate “rollover” as the reason. Most tax software programs guide you through this process. 

Bottom line

A reverse rollover isn’t for everyone, but in certain situations, it makes sense. If you want to delay RMDs or perform a backdoor IRA conversion, moving IRA funds into a 401(k) could be beneficial. However, it’s generally not recommended by financial experts unless you’re looking to benefit from niche tax planning scenarios.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.